Moneyball without the ball

Time to Get Out?

So I’ve been doing some reading (lots of reading) and ‘ve come to the conclusion that this situation in Europe is most likely going to end in a disaster…

I’m going to start this post with Europe, and I’m going to end it with my portfolio. From the macro to micro, so we begin:

First of all, lets separate the immediate problem from the almost immediate problem.

The immediate problem is the concern that there is stress in the European banking system and that this stress is going to intensify and some bank is going to blow up.

This was brought to the forefront in this WSJ article on Thursday: Fed Eyes European Banks. The markets tanked on Thursday and were stressed on Friday because of this article. The basic problem that can occur is this.

Foreign banks that lack extensive U.S. branch networks have a handful of ways to bankroll U.S. operations. They can borrow dollars from money-market funds, central banks or other commercial banks. Or they can swap their home currencies, such as euros, for dollars in the foreign-exchange market. The problem is, most of those options can vanish in a crisis.

If you are a little bank in Shreveport Louisiana you rely on deposits for liquidity. Unless your depositers decide to pull out all their money you don’t have to worry about having enough money to fund your operations. If you are a big bank that has foreign operations but no branches in that country to take deposits, you rely on debt markets for liquidity. When debt markets get worried, there is no more liquidity. Then you are screwed.

When you are a too big to fail bank and have no deposits and the debt market gets worried, then we are all screwed.

The actual or perceived stresses have led to further actual stresses (perception is reality in the finanical markets no matter what the EU Officials will have you believe):

The cost of protecting European financial debt surged to an all-time high today. The Markit iTraxx Financial Index of credit-default swaps linked to senior debt of 25 banks and insurers increased as much as 12 basis points to 243, a record based on closing prices, according to JPMorgan.

So the important question is, how immediate are these funding stresses and are they about to go parabolic. From a Bloomberg article on Friday:

“Our funding stress indicators continue to flash amber,” Citigroup Inc. analysts led by Kinner Lakhani said in a note to clients today. “Most indicators weakened yesterday, but remain below the highest levels of last week.”

“Banks are still funded, they’re well funded,” Konstam said during a Bloomberg Television interview on “Surveillance Midday” with Tom Keene. “I think the investors are more worried about funding than the banks themselves are.”

$500m is not massive it’s still bigger than the $50m dribs and drabs that were allotted the last time the ECB swap was in use, around February. We think that use was about a bank taking a few precautions rather than needing the money.

It doesn’t sound like funding problems are going parabolic. Yet.

I wouldn’t expect them to really. I mean nothing has blown up yet. Right now we are just at the point where the specter of something blowing up is coming closer.

Which leads us to the almost immediate problem.

This problem was put succiently by JP Morgan in a recent report.

The JP Morgan report excerpt, titled The Maginot Lines, outlines the options that Europe has to deal with their sovereign debt problems. This has been posted in a few places but I read about it on Zero Hedge.

If you read through the list it does not provide a lot of hope. Expand the EFSF to a trillion euros or more? Get the EU to agree on Eurobonds? Get the IMF to backstop everything?

How is this going to end well?

Moreoever, JP Morgan drops the reality hammer with the following statement.

What we do know is that these steps are unlikely until there is some kind of market riot, which means asset prices may be much lower by the time they happen.

Lets bring this back home. What am I going to do with my investments on Monday, on Tuesday, and for the rest of the week?

To summarize the above points, the immediate problem of bank insolvency is probably not going to escalate in the immediate future. The almost immediate problem of national insolvency is likely to escalate in the next few weeks. So there is some time (hopefully) but not too much.

After perusing my portfolio, I’ve drawn the following conclusions:

Gramercy Capital has to go

All oil stocks need to be trimmed

Oneida Financial needs to be cut in half

Leader Energy Service needs to be cut by as much as I can cut it without affecting price.

Gold stocks need to be evaluated based on performance. If they continue their breakout: hold. If not: trim.

I’m going to start to do this on monday. I hope that I am right that I have at least a few days to finish these changes and that Monday is not a watershed event.